Arbor Capital

Risk On

October 10, 2013 by Matthew Kolesky

We don’t hear risk on / risk off from the pundits on TV as much these days but risk is certainly on and the risk is coming from Capitol Hill. Much more is on the table than a budget battle between the GOP and Obama, the debt ceiling and Obamacare, etc. And now volatility in the stock markets have picked up.

Two articles struck me when reading the FT this week. One talked about the dire implications of a US default. Yes, the Chinese and Japanese are making noise and as holders of about 1 $trillion in US debt each, they can and should. They’ve loaned us money to pay for our government that we voted for and we should pay them back and not give them heartburn about it. After all the US treasury markets are the deepest, most liquid and safest in the world. They don’t expect heartburn about getting money back they’ve loaned the government of the United States and neither does anyone else.

And that is the problem that gets overlooked. Do we still deserve to be the worlds’ reserve currency and parking place for safe money? The other article that caught my attention discussed trading of the Chinese renminbi in various markets around the world. According to the Financial Times, overall trading volumes in the Chinese currency have risen 113 per cent this year passing the Swedish Krona and Russian Rouble. Volumes are expected to continue to rise. Trading in the Chinese currency still has a long way to go to catch the big ones: euro, yen and $ but it is making significant strides that can’t be ignored.

As lawmakers continue to jostle in Washington, they need to be mindful of the impact they are having on global perceptions of the US debt buyers. Creeping into the markets and minds are alternatives that may, down the road, threaten the global reserve currency status of the US$. This is important because we enjoy benefits of this status, lower interest payments being one of the largest of this exorbitant privilege.

Other Updates

If you’ve read my articles on our website before, you know that I’ve followed Facebook with interest from its rise out of an American university to its IPO and now growth into the mobile sector. As they figured out how to monetize users, the stock price has recovered and moved higher than the IPO price as I write this on October 10th, 2013. Twitter is planning to IPO as well, filing last week. America continues to be the global leader in innovation which is really what underpins our economy and reserve currency status. On a flight in Europe recently, a German businessman was sitting in front of me. As he got up to get off the plane, he has his iPhone and coke in hand.